Quote from @John Carbone:
Quote from @Nick H.:
This is a chaotic argument, idk why I'm getting involved. Few points:
1) Easier to look at broad averages here, i.e. all of the US, rather than 1 location. All of the US according to zillow is plateauing but has not dropped. Of course some markets have dropped, and some are continuing to rise.
2) Definitely need to be looking at change from the peak like @Bruce Woodruff correctly indicated. i.e. (this is purely hypothetical) if 12 months ago avg price of homes was $1,000,000, and they rose to $1,500,000 6 months ago, and then back to $1,000,000 today - it's relevant to what we're talking about that prices went down 33% from the peak - and the buyers who bought at $1.5M are in rough shape. We don't simply say "prices are flat" and move on.
I do not think it is very likely that prices are going to go down by 20%+. Maybe a short term pullback of 5 - 10% on average, sure, that's very possible. Let's think about how supply and demand are each affected by interest rates going up. Simple econ 101.
Demand is obvious - demand decreases as rates rise because each dollar of home that you buy becomes less affordable w/ a higher interest mortgage. i.e the subset of people who can afford a given home goes down
Supply - supply decreases as rates rise because fewer owners want to sell their homes, i.e. the subset of people who choose to put homes on the market goes down
So as rates rise, demand decreases, but so does supply. These are the two ingredients to home prices (to prices of anything....). No one knows the magnitude of the demand shift and the supply shift, so we cannot "mathematically" say we know what is going to happen. But, as @James Hamling (and maybe others?) has pointed out - we do have a roadmap of real world data in the 1970's when there was high inflation and quickly increasing interest rates. Real estate did not go down - it went up.
It went up because inflation was high (that increases the prices of all stuff... i.e. wages roughly doubled in the 1970's) and because while the increasing interest rates lowered demand for housing, it also lowered the supply of it (less ppl wanting to sell because they were locked into much lower rates). So you had lower demand / lower supply that may roughly cancel out, and you have a lot of inflation, which puts upward pressure on home prices. So homes went up >2X in the 1970's.
Certainly, as others have mentioned, if unemployment goes way up, to say, 10% like it did in 2009 (I don't think anyone credible thinks that is a likely outcome), then that would be a big risk to home prices because defaults go up, rent ppl are able to pay goes down, etc. Outside of that, there aren't many big risk factors here of a large decline in residential RE. Anything is possible (as it has been in 2011, 2012, 2013, 2014, 2015, etc), but I don't see any data/economic based reasoning that would lead to me betting on a 20% decline. The main argument I've heard in this thread from the "crash" side (outside of anecdotal evidence) is that since rates have gone up so much, it only makes sense for prices to come down - but I (very respectfully - we're all on the same team here) disagree as that ignores the supply side dynamics of rate increases.
Note: for full transparency, imo commercial/apartments probably higher risk of decline (compared to SFH's), given they're tied to shorter term debt
I don’t think it ignores the supply side. The demand shift from buyers is projected (by me) to be significantly more than the supply side. So there will be excess inventory of homes and apartments. Americans find ways and adapt. Apart from places in California in this country, we don’t have people living on the streets in droves everywhere. People are living somewhere right now. If someone doesn’t own a home now, there’s nothing they can do to afford it other than make more money. The problem is, wages are not growing with inflation to have this be a similar situation in the 70s. Wages are growing for the very bottom rung of workers in society, but these people are also experiencing the brunt of inflation with higher food and energy prices along with rents doubling…plus they likely will now owe federal taxes due to bracket creeping. Buyers will find alternatives for living arrangements when they are pushed into a corner…it’s already happening. When demand craters, there will be supply and at the right price a transaction will occur.
This is based on emotion Joe, not facts or data, just your emotion and feelings of things, that's what makes it so wildly inaccurate and incorrect.
We site a more then 6million unit net shortage right now today. That's an unprecedented number, it took an entire decade of the most epic slowdown, and total stop, in home building to create such an epic unit shortage. That is a massive absorption factor your not taking into any account.
As for rentals, i have no idea how you can think there will be any excess of rental units, that's completely opposite of your own argument. people loosing homes RENT. Your own argument is one that makes MORE renters, yet you say there will be empty units all over, and empty homes. Where are all these people going? Your talking more then 18 million people.
What will buyers do, they will adjust there purchasing. It's not to buy or not to buy, it's not an on or off switch. The adjust pricing level, that's it. This is Market Compression; buyers who were 400-500 move too 350-450, those who were at 300-350 move to 250-300, etc.. And as the bottom pricing rungs get stacked with buyers it RAISES competition, which raises pricing, for the lower strata of homes.
And the whole time, rental rates run up, as more and more move into rental vs purchasing.
AT END OF THE DAY, the risk vs reward is HEAVILY risk weighted for sellers in this environment where more then 75% have current rates of sub 4/5%. AND buyers are highly REWARD weighted, despite the higher rates, as it's the same cycle it has always been; a renter is paying matching or more for rents vs ownership, and getting nowhere with the payments, 0 equity, moving nowhere forward just burning $. The #1 reason people buy a home, SECURITY, via accruing equity. This will not change at 8% nor 14%.
SO your premise is dead flat wrong, it's disconnected from the reality of social dynamics. Sellers have greatest risk, lowest reward, and hence they will wait it out, making much MUCH less sellers. Buyers will have exact same motives as ever, just adjusted budgets.
Impacts will be seem in relation to areas household median incomes, far as which pricing levels have compression in what direction. An area with median incomes of $700k will have downward pressure on homes upward of $1m mark where areas of household median income of say $65k will see compression on pricing at entirely different levels, including much more upward pressure on the lowest pricing strata.
It will NOT, I say again NOT be a universal downward pressure on home prices. There will NOT be mass vacant units.
Print this out, save it, my e-mail and # is here. I have a greater then 90% certainty score on this forecast. That, in forecasting, is absolute certainty, as close to 100% as anything gets. I am trying to help people by sharing this, I get paid considerably for this advisory. I don't need to post such here, I am trying to help the "average Joe" from making a horrible mistake via following the loudest arm-chair quarterbacks and not knowing the difference from solid analysis and guesstimates.
